Returns On Capital Are Showing Encouraging Signs At Bay Area Gold Group (HKG:1194)

Simply Wall St
March 19, 2022
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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Bay Area Gold Group (HKG:1194) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Bay Area Gold Group, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.012 = HK$59m ÷ (HK$10b - HK$5.4b) (Based on the trailing twelve months to June 2021).

Therefore, Bay Area Gold Group has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 13%.

View our latest analysis for Bay Area Gold Group

SEHK:1194 Return on Capital Employed March 19th 2022

Historical performance is a great place to start when researching a stock so above you can see the gauge for Bay Area Gold Group's ROCE against it's prior returns. If you'd like to look at how Bay Area Gold Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

While the ROCE is still rather low for Bay Area Gold Group, we're glad to see it heading in the right direction. The data shows that returns on capital have increased by 68% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 50% less capital than it was five years ago. Bay Area Gold Group may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 53% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Bay Area Gold Group's ROCE

In the end, Bay Area Gold Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has dived 100% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

One more thing: We've identified 3 warning signs with Bay Area Gold Group (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

While Bay Area Gold Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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